By Anand Sahasranaman, IFMR Finance Foundation
The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, set up by the RBI in September 2013, was mandated with the task of framing a clear and detailed vision for financial inclusion and financial deepening in India.
In its final report, the Committee has outlined six vision statements for full financial inclusion and financial deepening in India:
- Universal Electronic Bank Account (UEBA): Each Indian resident, above the age of eighteen years, would have an individual, full-service, safe, and secure electronic bank account.
- Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges: The Committee envisions that every resident in India would be within a fifteen minute walking distance of a payment access point.
- Sufficient Access to Affordable Formal Credit: Each low-income household and small-business would have access to a formally regulated lender that is capable of assessing and meeting their credit needs. Such a lender must also be able to offer them a full-range of suitable credit products at an affordable price.
- Universal Access to a Range of Deposit and Investment Products at Reasonable Charges: Each low-income household and small-business would have access to providers that can offer them suitable investment and deposit products. Such services must be available to them at reasonable charges.
- Universal Access to a Range of Insurance and Risk Management Products at Reasonable Charges: Each low-income household and small business would have access to providers that have the ability to offer them suitable insurance and risk management products. These products must at minimum allow them to manage risks related to: (a) commodity price movements; (b) longevity, disability, and death of human beings; (c) death of livestock; (d) rainfall; and (e) damage to property.
- Right to Suitability: Each low-income household and small-business would have a legally protected right to be offered only suitable financial services. She will have the right to seek legal redress if she feels that due process to establish Suitability was not followed or that there was gross negligence.
The Committee lays down a set of four design principles, namely Stability, Transparency, Neutrality, and Responsibility, that will guide the development of institutional frameworks and regulation for achieving the visions outlined. Any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability, and at no cost should the stability of the system be compromised. A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stress situations on this status. In addition, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character. Finally, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers, and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.
At its core the Committee’s recommendations argue that in order to achieve the vision of full financial inclusion and financial deepening in a manner that enhances systemic stability, there is a need to move away from a limited focus on any one model to an approach where multiple models and partnerships are allowed to emerge, particularly between national full-service banks, regional banks of various types, non-bank finance companies, and financial markets. Thus, the recommendations of the Committee seek to encourage partnerships between specialists, instead of focussing only on the large generalist institutions.
In the spirit of the RBI’s approach paper on differentiated Banks, the Committee recommends that the RBI may also seriously consider licensing, with lowered entry barriers but otherwise equivalent treatment, more functionally focussed banks like Payments Banks, Wholesale Consumer Banks, and Wholesale Investment Banks. Payments Banks are envisaged as entities that would focus on ensuring rapid out-reach with respect to payments and deposit services. The Wholesale Consumer Banks and Wholesale Investment Banks would not take retail deposits but would instead focus their attention on expanding the penetration of credit services. The Committee also recommends that the extant Priority Sector Lending norms be modified in order to allow and incentivise providers to specialise in one or more sectors of the economy and regions of the country, rather than requiring each and every bank to enter all the segments. Finally, the Committee proposes a shift in the current approach of customer protection to one that places greater onus on the financial services provider to provide suitable products and services.
To read the full report click here.
In the coming weeks IFMR Finance Foundation will analyse different aspects of the report as part of a blog series.